Subprime Mortgage Design

Posted: 29 Oct 2008 Last revised: 30 Jul 2013

See all articles by Geetesh Bhardwaj

Geetesh Bhardwaj

SummerHaven Investment Management

Rajdeep Sengupta

Federal Reserve Bank of Kansas City

Date Written: 2012

Abstract

This paper offers evidence on the design of subprime mortgages as bridge-financing products. We show that the viability of subprime mortgages was uniquely predicated on the appreciation of house prices over short-horizons. High rates of early prepayments on subprime mortgages are suggestive of the use of prepayments as an exit option. This paper argues that high early defaults on post-2004 originations can be explained when one considers high early prepayment rates for pre-2004 originations.

Keywords: mortgages, subprime, refinance, prepayment, crisis

JEL Classification: G21, D82, D86

Suggested Citation

Bhardwaj, Geetesh and Sengupta, Rajdeep, Subprime Mortgage Design (2012). Journal of Banking and Finance, Vol. 36, No. 5, 2012. Available at SSRN: https://ssrn.com/abstract=1290716 or http://dx.doi.org/10.2139/ssrn.1290716

Geetesh Bhardwaj

SummerHaven Investment Management ( email )

Soundview Plaza,
1266 East Main Street
Stamford, CT 06902
United States

Rajdeep Sengupta (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

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